Global stock markets finished with mixed performances last week, as the Nikkei 225 and S&P 500 posted declines (the first weekly decline of 2013), while the DAX and FTSE 100 moved higher. A large part of this activity was based on the differences seen in central bank comments, as there is mounting evidence that the US Federal Reserve will have room to start cutting back on its stimulus program while the central banks in the UK and Eurozone have received comments suggesting that bond buying programs might increase throughout the year.

Additional positives for the Euro area were seen with the German ZEW and IFO surveys, which came in much higher than markets had expected, and this is an indication that business confidence is improving in the region’s largest economy. It is clear that the central bank commentary was the main driver of the week, however, as both the Euro and British Pound fell as stock markets in those regions gained. Stimulus programs tend to have this effect on these different markets, and this is a suggestion that traders are looking past the short term economic data and considering the longer term view.

Corporate Earnings Shows Heavy Calendar Next Week

US Stocks were unable to continue on with this year’s rally last week, even with positive earnings results from the world’s biggest PC maker (HP, which rallied nearly 15% on the week). Next week, however, the focus is likely to shift as the heavy calendar for Retailers approaches. Between Monday and Thursday we will see releases from Target, Saks, Macy’s, Home Depot, Lowe’s, Dollar Tree, Limited, Gap, JC Penney, Sears, Best Buy, and Kohl’s. This is likely to create a good deal of volatility in the short term and makes it very risky to commit to CALL/PUT bias for stock markets indices (particularly the S&P 500) next week.

Other reasons to stay on the sidelines with the major indices come with the March 1st deadline to stop automatic spending cuts, as a negative result would surely send the S&P lower and a positive result might only have a limited upside effect. So far this year, the S&P 500 has gained 6.3%, and nearly 75% of the companies in that index have beat corporate earnings estimates this season. The S&P is now trading below 15 times earnings, still under the 60-year average of 16.4, so there is still scope for upside but given the runs so far this year, a downside correction continues to look more likely.

My Trading Recommendations in 50 Words:

1. Next event in line for the fate of the EUR/USD can be seen with the Italian elections. A Berlusconi victory would not be Euro positive, so if he loses I will buy weekly CALL options on a Monday break in the EUR/USD above 1.3230. This would also capitalize on some of the recent weakness in the pair and we can play the Euro from the other direction relative to last week, not that the downside has reached extreme short term territory.

2. In stocks, we will look to play some of the expected downside correction using Texas Instruments (TXI). The company showed weakness in its latest earnings report, is currently trading at a price to earnings ratio of 87 (excessively high), and is showing bearish technical signals on daily charts. Look to buy monthly PUT options on TXI at 60.

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